Mike Williams Like Christian Duguay was saying, our users use the M365 as a distribution list not knowing it is also a SharePoint site, mailbox, and much more even though we have had plenty of training in our organization on these. I find myself deleting and recreating groups often because our users do not know that they are creating a M365 group when they click the "New Group" button in Outlook and not a distribution list.
When I logged in this morning I found that after copying the membership of the group and putting it into a mail-enabled security group with a slightly different name has fixed the issue. I did the same thing for the M365 group as well as a test and that worked too but we are going to stick with the mail-enabled group as they only want a distribution list that also gives access to the file in OneDrive.
Per jcgonzalezmartin 's suggestion I have opened an incident with Microsoft since I am seeing more and more groups show up like this inside of OneDrive when trying to share.